For Non-Resident Indians (NRIs) looking to invest in property in India, the process might seem daunting due to complex regulations, documentation, and various financial considerations. Whether you’re purchasing a home to stay during annual visits or securing an investment for future returns, understanding the essential guidelines can save you from costly mistakes. Anita Reddy, an NRI residing in the US, is currently navigating these waters by purchasing a residential flat in Hyderabad. She has already verified RBI rules, secured a property title, and authorized her father in India with a power of attorney. If you’re an NRI considering similar steps, here are the five crucial things you should keep in mind before diving into the Indian real estate market.
1. Know the Legal Framework for Property Ownership
Under the Foreign Exchange Management Act (FEMA), NRIs are allowed to purchase residential and commercial properties in India, but there are restrictions. They cannot buy agricultural land, plantation property, or farmhouses, unless inherited or approved by the Reserve Bank of India (RBI). This is a key distinction that needs to be understood before making any purchase.
What to remember:
- Residential and commercial properties are permissible.
- Agricultural land and farmhouses require special permission or inheritance.
2. Understand How to Fund Your Property Purchase
Funding a property purchase in India involves careful attention to the source of funds. If the money is being sent from abroad, it must be transferred to a Non-Resident External (NRE) account. This ensures compliance with FEMA guidelines, and the funds can be used for the purchase while making it easier to repatriate proceeds later.
Ankit Jain, Partner at Ved Jain and Associates, emphasizes the importance of retaining bank statements as proof of the source of funds, particularly for future repatriation. For loans, NRIs can also apply to Indian banks, and the loan repayments must be made from NRE accounts, in accordance with RBI guidelines.
How to fund:
- Use NRE accounts for foreign transfers.
- Loans are available from Indian banks, with repayments from NRE accounts.
3. Be Aware of Tax Obligations
NRIs must be vigilant about tax matters when buying property. When making a payment to the seller, the Tax Deducted at Source (TDS) must be properly deducted on the sale consideration. Failure to do so could lead to tax liabilities.
Even if the property’s income is below taxable limits, it is advised to file annual tax returns to maintain a clear tax record. In the case of home loans, deductions on the principal amount and interest paid can be claimed under Sections 80C and 24(b) of the Income Tax Act, provided the NRI has taxable income in India.
Key tax considerations:
- Ensure TDS is deducted and deposited.
- File annual tax returns, even if income is below taxable threshold.
- Claim home loan deductions under Sections 80C and 24(b).
4. Factor in the New Remittance Tax
The 3.5% excise tax on remittances by non-US citizens adds to the cost of sending money abroad. While this tax is levied on the sender and is non-creditable in India, NRIs can reduce this burden by remitting jointly with a US citizen family member.
Gagandeep Sood from Fox Mandal Global advises NRIs to factor in this extra cost when transferring funds. He also recommends retaining documentation of the remittance transaction to ensure the legitimacy of the funds, especially in high-value deals.
Things to consider with remittance tax:
- A 3.5% excise tax applies to remittances by non-US citizens.
- Joint remittances can reduce the burden.
- Keep documentation of the transaction for high-value transfers.
5. Proper Documentation and Due Diligence
NRIs must ensure they have all the necessary documentation before purchasing property. The required documents include a valid passport (or OCI/PIO card), PAN card for tax purposes, proof of address from both India and overseas, and a power of attorney if the transaction is being managed by someone else in India.
Ravi Shankar Singh from Colliers India highlights that choosing a reputed developer and verifying the property’s title, legal status, and government approvals are essential steps in due diligence. This helps avoid potential legal disputes and ensures a smoother transaction process.
Documentation checklist:
- Passport and OCI/PIO card.
- PAN card for tax purposes.
- Proof of address (both India and overseas).
- Power of attorney (if applicable).
Quick Facts at a Glance
| Key Factor | Considerations |
|---|---|
| Legal Framework | NRIs can buy residential and commercial properties. Agricultural land requires special approval. |
| Funding | Use NRE accounts for foreign transfers, and home loans are available from Indian banks. |
| Tax Obligations | Ensure proper TDS deduction and file annual tax returns. Home loan deductions available. |
| Remittance Tax | 3.5% US excise tax on remittances, but joint remittance can reduce costs. |
| Documentation | Passport, PAN card, proof of address, and power of attorney required. |
Frequently Asked Questions (FAQ)
1. Can NRIs buy agricultural land in India?
No, NRIs cannot buy agricultural land unless it is inherited or approved by the Reserve Bank of India.
2. What is the best way to fund my property purchase in India?
If funding from abroad, use an NRE account to comply with FEMA guidelines. You can also apply for home loans from Indian banks and use the NRE account for loan repayments.
3. How does the remittance tax impact my property purchase?
The 3.5% US excise tax on remittances adds an additional cost, but joint remittance with a US citizen may reduce this burden.
4. Do I need to file tax returns in India as an NRI?
It is advisable to file annual tax returns in India even if the income from the property is below the taxable threshold. This simplifies tax compliance and future transactions.
5. What documents are required to buy property in India as an NRI?
The essential documents include a valid passport (or OCI/PIO card), PAN card, proof of address, and a power of attorney if someone else is handling the transaction.